R&D Tax Credits – An Underutilized Small Business Tax Benefit

The culture of any business can be very well deciphered from the pattern of expenses that it incur and to make the Research and Development an integral part of any organization it is absolutely mandatory that a company spends effectively in R&D avenues. R&D spending does not always turn out quantifiable results in the short run. Sometimes the research facility runs the chances of failure as well, and most of the time this potential failure discourages small businesses to spend more on R&D. Therefore, it seems helpful if the government encourages R&D spending, and in many of the developed countries this process has already started in the form of R&D tax credit.

Benefit mechanism

Small and medium scale companies which are defined either by their limited turnover or limited number of employees can avail post tax benefits of the range 8% – 25% by claiming their expenditures in R&D avenues.

The spending can be allocated to various modules which will later end up in a consolidated R&D spending figure.

These avenues are as diverse as

•  Cost of staff

•  Cost of consumables

•  Cost of various electronic data processing instruments

•  Cost of sub-contractors

On the subcontracting part, a company can avail higher benefits if it formulates a deal with a higher education institute for research assistance purposes.

Though while making an R&D expense, the company should keep a strong watch on whether the spending qualifies for the following conditions.

•  It promotes or acts towards advancement of the larger domain of science and technology and does not end up becoming a mere cost reduction process engineering.

•  The technological up gradation related to the research should be aimed towards solving a generic scientific uncertainty that will help science as a discipline.

•  The entire process should be well drafted and minutely documented so that whoever wants to replicate the same for the company can do so and the benefits become sustaining for the organization.

Under utilization

Despite having so many benefits the participation of businesses in this facility has been lower than expected and where small businesses constitute 40% of the private-industry research, only 23% of R&D credits claimed comes from them.

The reasons of underutilization has been many and diverse, but studies have found out relevant pointers that can summarize the reasons behind it into three following categories.

  The organizations do not even know that they qualify for such a provision. This unknowing happens at multiple levels. Some of the companies are not at all aware of R&D tax (www.ato.gov.au/Business/Research-and-development-tax-incentive/) credit; though the percentage of such organizations are low. There is another set of companies who know that the provision exists but are not able to map their relevant spending to the domain of qualified R&D. This calls for expert suggestions and consultation. Also promotion of the provision by business chambers and merchant houses will help.

  There are a bunch of companies who knows the rule in and out, but lacks the efficiency within the organization who can calculate the detail claims as the credit formula has often been found to be a complex one generate the scope for expert involvement.

  R&D expenditures are not known for producing results in the short term and long term outcomes are often beyond the affordability limit for a small company who is not in a position to put a large chunk of his asset in R&D rather than running his day to day operations.

As a whole, R&D tax credit can be useful and beneficial only when used effectively with a clear long term vision in mind. Most of the small companies lack farsightedness and that’s what results into underutilization.